Weekly Hurriyet column: Box of chocolates from Central Bank
Below is my Hurriyet Daily News column for this week, which you can also read at the Daily News website. No cheesy titles this time around, but I was just doing a simple wordplay with the word “box”, while at the same time paying homage (0:28-0.55, pronounced as creatively as Brad Pitt’s I-talian) to one of my favorite movies of all time.
By the way, as a reader noted as a comment to the Daily News column, it is “hard to believe the writings of someone who thinks that Tom Hank’s character in Forrest Gump was an American philosopher”. I have to give her that:), but wouldn’t you say that someone who has inspired so many should be called a philosopher, even if he has a room-temperature IQ?:) Besides, it is hard to believe the writings of someone who names his blog after the stands he watches Besiktas games from in the Inonu Stadium, either. Anyway, I think the best way to deal with my antics is to accept that “I have a style of my own; you all have to get used to it” (00.32-00.38).
Anyway, there will be a proper addendum in a few hours, but in the meantime, on to the column:
A great American philosopher once said: “Life is like a box of chocolates, you never know what you’re gonna get.” I satisfied my sweet tooth as well as having some sour grapes last week, all thanks to the Central Bank of Turkey.
Although the Central Bank usually supports its quarterly inflation reports with analytical boxes, the 11 boxes in the latest report, which was released on Thursday, provide a lot of timely and relevant analyses.
I have criticized Gov. Erdem Başçı several times for making bold statements about the Turkish economy without providing any proof whatsoever for his claims. These extra analyses address many of my past concerns.
For example, the Bank was saying for a long time that labor costs were falling. Now, I know, thanks to a well-written box, that they were talking about seasonally-adjusted unit labor costs, which take into account productivity as well.
I have also claimed several times, based on natural unemployment estimates, that there could have been some capacity loss as a result of the crisis. Another box, based on an upcoming Central Bank working paper, shows this is not the case.
Incidentally, the Bank seems to finally have decided to put its research where its mouth is as well. First, just as I was criticizing Başçı’s presentation at a conference in Denizli for the failure of its simple graphs to demonstrate a causal relationship between credit default swaps and unemployment, his working paper on this topic was released.
I have also heard that they are working on a paper about the foreign exchange rate pass-through mechanism, one of the Bank’s main arguments in support of its benign inflation outlook. Başçı gave some figures during his meeting with bank economists on Friday, so it will be good to see the methodology behind the numbers. And I hope the Bank will continue this recent habit of supporting its claims with research.
If the Central Bank’s Inflation Report was first-rate, its handling of the lira tremors between July 21 and July 25 was anything but. As I had expected, the Bank cancelled its foreign currency buying auctions on Monday, after Gov. Başçı’s innocent remarks in Denizli on the need to reduce foreign currency open positions were blown out of proportion and weakened the lira.
Since the Bank was buying $30 million of foreign currency each day, the measure means that about $600 million of liquidity will be left in the market each month to reduce pressure on the lira. Similarly, the Bank also decreased required reserve ratios, or RRRs, for banks’ long-term foreign currency liabilities.
Once the new ratios are effective on Aug. 5, the Central Bank foresees that “liquidity amounting to approximately $590 million will be provided to the market.” But according to the short press release announcing the decision, the goal is “to lengthen the maturity structure of liabilities in the banking sector.” I immediately got several email questions, two from Turkey economists, asking me if these measures were not contrary to the Bank’s earlier policies of RRR hikes.
That same American philosopher also said that “stupid is as stupid does,” and confusing markets with such statements is not a smart move.
*Emre Deliveli is a freelance consultant and contributor to Roubini Global Economics. Follow his blog, The Kapalı Çarşı.
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